TAK - Takeda: Why I'm Staying Bearish On This Generic Drug Dividend Play

2023-10-24 14:43:31 ET

Summary

• High yields may seem attractive, however, homework can go a long way.
• Takeda's Phase 3 ADMIRE CD II study & Phase 3 EXCLAIM-2 trial both failed to meet key endpoints, thus impacting the company's FY23 outlook.
• When the company reports Q2 earnings on October 26, don't be surprised if FY23 forecasts are revised downward.

As a dividend-driven investor, there's no doubt that a solid company with a juicy yield is going to get my attention. However, not all yields are as juicy as they look and seasoned investors such as those reading this article must not throw caution to the wind and assess the risks before they're enticed by the potential reward.

In this article, I wanted to take a closer look at the potential risks associated with establishing an investment in Takeda Pharmaceutical Company (TAK) and which resides in the market segment of generic drug manufacturers and currently possesses an annualized yield of 4.43%.

Takeda Pharmaceutical Company

Headquartered in Tokyo, Japan the company "engages in the research, development, manufacture, marketing, and out-licensing of pharmaceutical products in Japan and internationally. It offers pharmaceutical products in the areas of gastroenterology, rare diseases, plasma-derived therapies, immunology, oncology, and neuroscience".

Shares of TAK, which are currently priced at $14.53 (as of 10/20/23) and yield 4.43% ($0.64) are considered to be in the midst of an unfavorable downtrend since they are trading 4.79% below their 20-DSMA, 5.61% below their 50-DSMA, and 8.43% below their 200-DSMA. Not only should investors be concerned with the downtrend but they also need to take into account some of the recent developments impacting the company's drug development pipeline.

When it comes to Takeda's drug development pipeline, I want to focus on both the recently announced results of its Phase 3 ADMIRE-CD II study which assessed the efficacy and safety of Alofisel® (darvadstrocel) and the results of the Phase 3 EXCLAIM-2 study which was an open-label study designed to investigate the safety and efficacy of EXKIVITY as a monotherapy in the U.S. for adult patients.

The Phase 3 ADMIRE-CD II study assessed the efficacy and safety of Alofisel® (darvadstrocel) for the treatment of complex Crohn's Perianal Fistulas ('CPF'). Essentially the company was hoping for the study to meet its 24-week combined endpoint for remission, however, it failed to do so. As a result of the study, Takeda noted that its leadership is "continuing to assess the financial impacts of the Phase 3 ADMIRE-CD II study results , including impairment loss for intangible assets, on the fiscal quarter ended September 30, 2023. Any revisions to the consolidated forecast for the fiscal year ending March 31, 2024 (FY2023) will be announced during Takeda's second-quarter earnings call, scheduled for October 26, 2023".

The Phase 3 EXCLAIM-2 trial is a multicenter, open-label study designed to investigate the safety and efficacy of EXKIVITY as a monotherapy versus platinum-based chemotherapy in first-line EGFR Exon20 insertion+ locally advanced or metastatic NSCLC. As a result of this trial, Takeda announced that it is voluntarily working with the FDA toward the withdrawal of EXKIVITY in the United States.

By coupling the results of both the Phase 3 ADMIRE-CD II study and the Phase 3 EXCLAIM-2 trial with the recent sentiment of the company's leadership, there seems to be an indication that we will see a revision in Takeda's consolidated forecast for the fiscal year-end during the company's Q2 earnings call on October 26.

What exactly that change will be, if any, is anyone's best guess, but what I'm thinking is that we'll see considerable downward revisions impacting most, if not all, of the following categories: Revenue (Q1 FY23 Est. 3,840.0), Core Revenue (Q1 FY23 Est. 3,840.0), Reported Operating Profit (Q1 FY23 Est. 349.0), Core Operating Profit (Q1 FY23 Est. 1,015.0), Reported Net Profit (Q1 FY23 Est. 142.0), Reported EPS (Q1 FY23 Est. 91.0), Core EPS (Q1 FY23 Est. 434.0), Free Cash Flow (Q1 FY23 Est. 400.0 - 500.0), and possibly Annual Dividend per Share (Q1 FY23 Est. 188.0). Please note that these numbers are in billions of Yen.

To put things into a bit of context, the company had noted that minimal declines were expected across its Core Revenue (low-single-digit % decline), its Core Operating Profit (in the low 10s % decline) and its Core EPS (low-20s% decline) numbers for FY23. Now that we've seen unfavorable results from both the Phase 3 ADMISE-CD II study and Phase 3 EXCLAIM-2 trial, there's a very good chance these declines could be considerably worse.

In my opinion its Core Revenue decline could be in the range of 10% or more, its Core Operating Profit decline could fall 15% or more, and its Core EPS decline could fall as much as 25% or more. In addition to the declines in Core Revenue, Core Operating Profit and Core EPS, there's a good chance a decline in Takeda's Free Cash Flow may occur and as a result its dividend may be reduced.

For potential investors looking to establish an income-driven position in Takeda, I'd actually look to avoid shares at their current levels as I strongly believe the company's forecasts will be revised further downward and as a result its dividend could be cut.

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